YBlockchain? Conference Steps Back To Step Forward
As a fan of reality, I appreciated the title and substance of the YBlockchain? conference in New Haven on April 13. I’m not a Yalie, so I don’t know how often this play on words has been used in titling events which Yale has sponsored. No matter, the use of “Y” here could not have been more appropriate. Thanks in particular to Diana Barrero Zalles for organizing the event and the students for helping to make it a success.
Now is an especially good time for alliances between crypto and the academic community. The ICO (initial coin offering) craze is over. The STO (security token offering) is still gestating. Enterprises are plowing ahead with a focus on DLTs (distributed ledger technology), practical but often less inspiring. Beyond the acronyms, there is a great need for theoretical underpinnings of the “why” of blockchain — why are we bothering with this system? To assess these underpinnings, academic institutions and their capacity to apply inter-disciplinary approaches are particularly valuable resources. Moreover, public blockchains continue to pose challenging problems in economics, math and computer science, where academia’s intellectual firepower could be quite helpful.
Why trumps how — this inaugural blockchain conference let participants step back, take stock, and refocus on this insight. Many blockchain gatherings address challenges of implementation — how to scale, how to be secure, how to govern projects, how to be legal, etc. YBlockchain? took a different tack, tackling a number of important “why” questions. Here are a few I highlight, listed in rough order of stronger to weaker answers to the question:
- Why do academic institutions need to incorporate the study of blockchain into their curricula? As Jamiel Shiekh of Chainhaus — who also teaches in blockchain, artificial intelligence and data science at Columbia, NYU and CUNY — stated in his opening keynote, blockchain is an economic system that facilitates reliable exchange of information with no central owner of the data. Beneficially, research around blockchains — as I noted on the Economic Panel and Jeff Bandman, of Yale Jackson Institute for Global Affairs & Global Digital Finance, reinforced in his talk later in the day — is a catalyst for reassessment of answers to supposedly settled questions, in economics (e.g., use of incentives), politics (e.g., governance), data control (e.g., machine learning), and computer science (e.g., distributed computing and cryptography). Academic institutions are expert in such reassessments.
- Why do we need code-based solutions to governance, as a complement to or even replacement for traditional legal solutions? One theme at the conference, well put by Patrick Byrne of Overstock for example, was that government intermediaries are often a source of corruption and regulatory capture, and that blockchain solutions which reduce the need for interaction with such intermediaries promise improved efficiencies and fairness. Of course, many of the more promising applications of blockchain seem to require initial cooperation of governments, somewhat ironic for a movement that often claims the flag of decentralization.
- Why do we need a decentralized method for transferring value online? Even crypto bulls often concede that banking systems in developed markets function adequately at relatively low cost and that the most attractive use cases for cryptocurrencies are rather in countries with unstable or corrupt governments (don’t cry for me, Venezuela).
- Why do we need security tokens, as distinct from securities? Improved ledgers — a core promise of blockchain and distributed ledger technology — reduce accounting errors, sometimes-substantial ones, such as in the number of shares outstanding in a public company. However, increased fractionalization of assets through tokens may not promote the necessary liquidity or information flow to make this liquidity informed. Consider the travails of the micro-cap stock market as it exists today. Have most whitepapers really been sufficient guidance for transactions in their tokens?
- Why should governments change fundraising laws and currency controls to accommodate cryptocurrencies? As well articulated by John D’Agostino of DMS Governance, governments may never see the interests in democratizing fundraising or in allowing virtually unfettered capital flows as outweighing the risks of fraud and funding of terrorist and criminal organizations. U.S. regulators look to classify as securities any tokens with the potential to change in value. Although there are those happy to oblige, such as closing keynote speaker Patrick Byrne, a flood of microcap token offerings may end up as welcome as the biblical plague of locusts. Moreover, as noted by Elizabeth Renieris of hackylawyER, there remains a nagging sense that other jurisdictions are more welcoming than the U.S. to blockchain fundraising. In truth, the most valuable cryptocurrency to date — Bitcoin — launched without seeking any government approval.
- Why does any flow of data, including the data supporting value, need to be uncensorable? If there is any government on the planet that imposes no restriction on speech, I’m unaware of it. Perhaps crypto communities will be pioneers here, but good luck with that NAMBLA coin.
Out of the mouths of babes: Davi Lemos, Class of 2019 and Executive Director at the Yale Blockchain Initiative, helped introduce the day with this key insight about communities — they can only scale through the power of shared stories, and a key objective of blockchain is conversion of listeners into story-tellers. In the wild, communities tend to max out at 115 or so individuals. Language allows trust on the basis of shared beliefs, not interactions — the former scale much better than the latter. Story telling is thus crucial to the direction of crypto — and all — communities.
Socrates lives — Jamiel Sheikh of Chainhaus walked through a valuable hypothetical to convey the intuition behind blockchain systems. Could we replace Bitcoin with emailed IOUs attaching original personal essays? We could if we believed in the value of these IOUs. The email would have to be copied to many people, to solve the double spend problem and replicate the immutability of a distributed ledger. The attached essay would have to be substantial enough to require a meaningful amount of time to produce, to replicate proof of work and prevent rampant inflation. Enough people would have to check that the essay wasn’t plagiarized, to replicate the mining process by which transactions are verified. Finally, the recipient of the IOU/essay would have to believe that it would have some value to another in a future transaction, similarly to what a bitcoin recipient must believe to accept bitcoin as value.
A number of types of blockchain use cases served as a shared frame of reference throughout the conference. There was discussion of quasi-governmental applications for blockchain, such as self-sovereign identity, voting, public procurement, and working with governments to achieve dramatic efficiency gains in real estate titling. Asset tokenization cases beyond real estate that were discussed included non-fungible tokens (NFTs), security tokens backed by energy projects, and tokenized carbon credits. Using blockchain to improve supply chain transparency was another reference use case, with food, diamonds and wine among the examples given. Other projects, like as metaMe and CoverUS, are using chains to facilitate control of and transactions in personal data, in particular health data.
Amidst all the talk of projects and progress, I found a kindred spirit, who served up healthy doses of thoughtful skepticism. Let my bromance — unrequited now, but let’s give him time — with John D’Agostino of DMS Governance begin. For many blockchain claims, John had what I considered thoughtful challenges, and I say, don’t stone the gadflies, but answer their questions wherever possible:
- For public blockchains like Bitcoin and Ethereum, anti-money laundering (AML) rules could be an “unsolvable problem,” effectively preventing anonymity as a feature. AML regulations are particularly concerning for institutions considering crypto ownership. To maximalists believing in the possibility of an uncensorable currency, John cautioned that, just as authorities effectively shut down online poker, they could effectively shut down Bitcoin (and presumably its many less mature and less valuable competing chains).
- To those chafing at regulatory hurdles (I’ve done some carping, I admit), John said that even supposedly strict U.S. regulators have actually been fairly permissive toward crypto. He noted a number of factors hurting blockchain’s standing with regulators, such as how much investors have lost in crypto winter, how many projects are still untested proofs of concept, and the lack of compelling use cases at scale. By contrast, Uber has been able to thrive despite arguably greater regulatory hurdles because it offers new and compelling consumer benefits.
- John was quizzical about the promises of “code is law” blockchain purists. Humans have long experience with the need to apply laws flexibly, to avoid unintended consequences, among other things. Code may not be particularly suited to such flexibility.
- Although this was hardly the first time I’ve heard this point, John noted that in the trade-off between privacy and convenience, consumers almost always opt for convenience. This is a crucial consideration for many blockchain projects in the media technology space near and dear to my heart.
- John expressed frustration with a number of aspects of blockchain liquidity. Despite over 10 years of investment, dealings in tokens impose excessive transaction costs (e.g., Coinbase). The outlook for liquidity for security tokens, at least in the near term, is disappointing. John cautioned that, ultimately, not all assets are meant to be liquid.
- Blockchains do not establish truth, but rather help maintain it. This puts the burden on solutions, such as those addressing the supply chain, to take steps to ensure the integrity of initial data entry onto their blockchains.
- Despite voicing a number of cautionary positions, John was optimistic about other areas, such as the outlook for custody and valuation. If parties with sufficient balance sheets are willing to assume from consumers and institutions the risk of loss of crypto, they should be able to provide custody. Improved disclosure should facilitate the necessary valuations of blockchain projects and tokens.
I could sum up the thrust of many of these points by reference to Shakespeare’s Macbeth. If AML and like laws block institutional involvement in public blockchains and private blockchains are seldom better than databases (the position of a few speakers at the conference), what’s the future of blockchain use cases? The call is to steer blockchain clear of this metaphor from the Bard:
[Blockchain’s] but a walking shadow, a poor player
That struts and frets his hour upon the stage
And then is heard no more: it is a tale
Told by an idiot, full of sound and fury,
Signifying nothing.
What’s old can be new again with blockchain — let’s take as examples asset classes and advertising. John from DMS put forth crowd funding and NFTs as two promising asset classes that could be given new life through blockchains. A tantalizing prospect for NFTs is the tremendous profit — on the order of Amazon’s — which Fortnite generates through the sale of skins, which seem ripe for tokenization. Of course, Fortnite has built its platform without a blockchain, so that we will have to see how NFT technology can add to the pie. Jeff Bandman said that blockchain has been a catalyst for rethinking what has been taken for granted, offering as one example the integration of the Basic Attention Token (BAT) into Brave’s browser. On the Economic Panel, I noted that, of the top third of tokens by market cap, BAT is one of the few dedicated to a particular use case, namely incentives for audiences to engage with advertising, which they can then use to reward publishers. I can’t tell you how many advertising pros say, “been there, done that” when they hear about advertising-related reward systems. Perhaps the fact that BAT is thus far one of the more hardy survivors of crypto winter might help reopen some closed conversations in the advertising world.
Youth shall be served — one of the more interesting people I met was one of the students handing out sandwiches at the lunch break. A graduating senior, he and some partners raised and successfully invested a $15 million crypto fund, largely using quantitative trading strategies. His post-graduation plan — after some vaca — is to turn his attention away from blockchain to focus on a venture offering a more tangible service, with backing from some of his satisfied crypto fund investors. My meta-message from this? Even though a substantial portion of the crypto community lives and dies on speculation, economic rewards alone may not be enough to attract and retain the best and the brightest to blockchain.
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